For years now, many analysts have lamented the exit of ordinary retail investors from the stock market. But even if typical investors are steering clear of stocks, more affluent households appear to be biting the bullet and adding to their stock positions -- even if they aren't all that optimistic about the market's future prospects.
Last month, Fidelity Investments came out with its 2012 Millionaire Outlook. The survey of about 1,000 households with net worth of $1 million or more not only pointed to what wealthy families are doing with their money but also revealed some common threads among millionaires that contain some lessons for those of all levels of wealth.
One of the key findings from the Millionaire Outlook is that wealthy households are continuing to be more optimistic about the financial markets. Although the overall view that millionaires have about the current financial environment is somewhat negative, sentiment has picked up substantially since its 2009 lows. Moreover, expectations for conditions one year into the future are at their highest levels since Fidelity did its first version of the survey in 2006.
When you look at the breakdown of various factors that contribute to that outlook, there's an interesting outlier: Millionaires are optimistic about the current state of the stock market. Even as they worry about weak real estate prices and a sluggish economy, their positive views about the current stock market environment temper their pessimism and build a foundation for their more positive outlook on the future.
What millionaires are buying
Fidelity also asked what millionaires were adding to their portfolios over the past year. U.S. stocks topped the list, with CDs and stock ETFs coming in distant second and third place, respectively. Most interestingly, even when Fidelity broke down investors into several categories, stocks remained the favorite investment vehicle. Whether investors' outlook was optimistic or pessimistic, and whether their main concern was to preserve wealth or to grow their net worth, stocks ranked No. 1 in added investments.
The primary difference, though, came from what else millionaires bought. Aggressive investors were more comfortable with international stocks and bond mutual funds, while more conservative investors tended to stick with CDs and cash equivalents. That's an interesting trend, as it shows the willingness of risk-taking millionaires to bet on further capital appreciation from the bond market despite record-low interest rates, while also seeking to benefit from the bargains amid the carnage in Europe that has taken Telefonica (NYSE: TEF ) and other solid companies down with riskier banks and other financial institutions.
Such a tendency also supports investments in rate-sensitive areas. Mortgage REITs Annaly Capital (NYSE: NLY ) and Chimera Investment (NYSE: CIM ) directly benefit from the current rate structure, while high-yielding utilities Southern (NYSE: SO ) and Exelon (NYSE: EXC ) also tend to see their prices move at least partially in line with changes in interest rates.
Are millionaires smart money or dumb money?
Of course, blindly following a herd of millionaires doesn't make any more sense than blindly following anyone else with your investments. Smart investors have to walk their own path even as they watch what other investors are doing.
Often, investor sentiment acts as a contrary indicator. But when you focus on wealthy households, do the usual contrarian rules apply, or do wealthy investors represent "smart money" that is worth following?
As I see it, the key to understanding how wealthy households are different from most people lies near the end of the survey. More millionaires are more interested in preserving what they've managed to accumulate rather than trying to make their wealth grow. In other words, millionaire households appear to be content with their current wealth levels and are more focused on not losing what they have. To me, that doesn't seem to mesh with their more optimistic actions, and so I'd be hesitant to characterize millionaire sentiment as completely positive right now.
What to do
By contrast, most non-millionaire households need to focus more on growth. Yet especially when you're just starting out, not having substantial financial assets can actually free you to be more aggressive with your investing, which in turn can make you more successful by getting you used to taking risk. In the long run, being willing to enter risky positions even during times when it seems unwarranted can make a huge difference to your quality of life. Taking the right risks can get you into the millionaire class sooner than you might think.
You don't have to be a millionaire now in order to reach your financial goals. We've got some ideas on how you can invest for the long haul in The Motley Fool's special report on stocks that will help you retire rich. Get your free copy today while it lasts!
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.